Sunday 28 October 2012

Until debt tear us apart?

Every month I do an analysis for newspaper Público of the implementation of the budget accounts (see here in Portuguese article 25/10/2012) based on historical records for each major item of revenues and expenditures, tax elasticities, detailed analysis of the data, etc..
It is very important to be aware of the implementation of the fiscal consolidation programme to understand whether fiscal measures are leading us to the desired lowering of public deficit in order to reduce Portuguese net borrowing requirements or not.
Starting with the simplest indicator – general government balance – the answer is no. Public deficit in 2011 (in national accounts), without one-off measures was 5,8% of GDP and in 2012 my estimate is 5,9%.    
The fiscal strategy of the Portuguese Government (under pressure of ECB/EC/IMF –the troika) was a severe cut in public expenditures through two major items (cut of two subsidies of pensioners and civil servants) and other smaller items of expenditure and to raise several taxes, more through an increase in tax rates than in tax bases.  
It is now clear that this strategy is not working. If the use of instruments does not achieve the target it is because the strategy is flawed. The social situation is getting worst, unemployment is rising, bankruptcy of firms is increasing, civil servants are frustrated with wage cuts and no career prospects, and yet …public deficit is not decreasing. However, neither the government nor the troika still recognizes this.

Deficit 2012 State Budget Rectified(1)
Lower tax revenues
Budget overestimation of central governments' Wages

Variation in Social Security Accounts

One-off measures (PTP) or savings (MF)
Défice 2012 OER(2)
Source: MF -Ministry of Finance, PTP-Paulo Trigo Pereira  - own calculations
Estimates of deviations from budget target  (% of GDP). Negative deviation decreases deficit.
(see detailed explanation and further information in the Portuguese article).
Curiously Portugal will have a surplus in the primary balance in 2012 (excluding interests of the debt). With a ratio of debt to GDP approaching 120% and a recession, unless there is a sharp and quick decline on the interests of the debt or Portugal will not be able to repay the principal. The ECB should anticipate the intervention in countries with adjustment programmes (under OTR) in order to decrease the interests of the debt.   It seems the only reasonable solution.

PS The IMF just released the 5th evaulation of the Adjustment Programme. It deserves a further scrutinity here... 


  1. Pedro this is great stuff, but a primary surplus is a necessary condition for the debt burden to fall (as it is unlikely that growth will dilute that debt in the near future). Could you please clarify how you see the debt dynamic exploding soon?

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